Asymmetrical Information

Ah, I love being a long time, loyal, die-hard customer of Southwest Airlines. The mere fact of their continued profitability and growth during these hard times must make other airlines weep with frustration.

If only I could get a job there.

-Donut

ditto for Jet Blue. On a related note...it's just one more reason why we should be spending some of our hard earned federal dollars on rail travel.

Now let's see what kind of responses that gets.

Why, so we'll have hideously expensive, outrageously subsidized, piss-poor service from two outlets instead of one?

More federal funds for rail is not the answer. We could have great private high-speed rail networks in the United States that would render flights less than 2 hours redundant, but the interminable wrangling over virtually every aspect of route selection and construction by layer upon layer of government entities and special interests masquerading as "public interest groups" makes that impossible.

Why do Southwest and JetBlue do so well if airlines are inherently uneconomical? They don't even soak the businesses spending other people's money for last minute tickets.

Could the problems be less inherent in the system and more related to bad cost structure? Maybe the financiers and labor need to cooperate to negotiate a plausible future for the big airlines they run instead of bleeding them dry for momentary advantage. I certainly hope the feds don't bail out more failing airlines.

I think that the current crisis in air travel (if it can be called that) presents a great moment to reshape the airline industry. The above commenters write well about Southwest and Jet Blue, America's (profitable) leaders in discount air travel. Europe, similarly, has EasyJet and Ryanair. The most expensive segment of air travel, though, remains intercontinental travel, and a liberalisation here could be great for consumers. The idea of being able to fly from New York to London for the same price as it costs to fly frm NYC to LA could spark a boom in mass-market travel, making volume, rather than price discrimination, the revenue model for most of the air travel industry.

Then again, there are things that work in favour of the staus quo. Business travellers, for one, don't like travelling with tourists. As they can't fly business class anymore, the airlines have established "premium economy". In an article last year in the Independent, CNN International's Richard Quest wrote:

"Enter the Fourth Cabin, World Traveller Plus or Premium Economy. It offers a bit more room (a seat pitch of 38 inches, which is actually four inches more than the original business class of 1977), a curtain you can sit in front of, and of course it isn't business class so it meets the corporate rules and regulations. It's not surprising that on most flights from the United States, the fourth cabin is full; after all, hand on heart sir, I didn't fly Club."

The full story is here:
http://travel.independent.co.uk/news_and_advice/story.jsp?story=134314

The market will still have price discrimination in some form (just look at Midwest Express) but that does not mean that international discount travel should not be encouraged. Rather than bailing the airlines out, the Bush Administration and Congress should push for a second airline deregulation.

Absolutely. There isn't anything wrong with Airline Industry that better management and labor won't cure. First, however, one needs to fire the existing management and labor entities. Let'em rot. It isn't as if the planes will be sold as substitute for discarded aluminum cans; the assets will end up in the hands of people who can mange them better, and can forge more viable realtionships with pilots and mechanics.

You could always try opening up the skies to a little foreign competition?

I'm all in favor of it. But they'll have trouble getting in since fiat-allocated slots rarely change hands -- and because the US won't do so unless Europe returns the favor.

Jane --

If you can't afford to replace and fix your trains, then no wonder they break down. All rail travel, throughout the world, is subsidized. In the US it's subsidized less than almost anywhere else, mostly so we can prop up a failing airline industry. I've taken the train across the country and down south and I must say it's a pleasent, relaxing journey.

So here is the question, do you bail out the airline industry once again, give them 40 billion, or whatever it is this week to let them continue to operate under a failing business model which will never work (and which is prohibatively expensive), pay an additional $400 for every person who wants to fly...

Or do you drop $2 billion on rail travel so they can fix their stock and maintain passanger rail, Passenger rail which, especially after 9/11, is way in demand. Remove that from the $40 billion you're going to drop on the airline industry and say, "Hey airlines, you can't make it on $38 billion, instead of $40 billion, you shouldn't be in business.

As a libertarian Jane, I'm gonna assume you're not in favor of any of it. But instead of bitching about the airline industry sucking, why don't we invest so hard earned money in an alternate system of public, long distance, transportation. That's true competition.

Uh, there is an alternate system of public, long distance transportation, that is constantly competing against air and rail travel. Down here in Texas, we call them roads. And lately, roads have been kicking butt down here. People I talk to don't fly unless it is more than a day's drive. Heck, sometimes driving to Houston (from Austin) is quicker than flying.

Personally, I think a better system of toll roads (like Oklahoma) is the best way to spend that money.

-Donut

Why not deregulate all of it and let people decide what they want to ride? Especially since the population density of the majority of the United States is simply not high enough to support passenger rail? Outside the Northeast Corridor, most of the trains run below capacity even at peak periods. It's a net energy loss, since public transit is only energy efficient if the trains are full; it's expensive; it's slower than air travel and less convenient than automobile travel; and operating decisions are made by legislative fiat rather than passenger travel. It also costs us over $1b a year in subsidies to move fewer passengers than the MTA. There is almost no demand for it anywhere in the country except the NE Corridor, and unlikely ever to be any, since most routes won't justify running even the one train a day they get. Putting more money into the rail stock wouldn't increase the number of passengers who want to ride it; it would just make each passenger cost more. And before you bring up high-speed rail, the reason we don't have it is that in order to get its subsidies, Amtrak has to run trains through every whistle-stop in every congressman's district. High speed rail is not high speed rail if it's running locally, but since, as aforementioned, there aren't enough passengers to justify two trains a day, you can't upgrade the lines to run a single high-speed train, even if you were willing to front the extraordinary capital costs to do so. Europe also jacks their gas prices sky-high to produce the demand they have for rail, which sounds fabulous if you live in New York City, but notso hotso if you live in a rural area and it suddenly costs you $10 each way to get to work. Finally, it's 1200 miles from Paris to Vienna, the westernmost and easternmost destination cities outside of the former Eastern bloc; half a day's ride on the train. To do the same journey to SF from New York right now is, I believe, five days. Doing it on high speed rail would require many, many miles of hideously expensive upgrades across miles of desert, through mountains higher than the alps, through hundreds of miles of sparsely populated farmland, in order to cut the journey to 3 days. Almost no one in America wants to spend 3 days on a train when they can get there in six hours, because that's half your annual vacation getting wherever you're going. Hell, no one I know in Europe wants to spend 3 days on a train. Besides which, rail has absolutely no hope of attracting the lucrative business market that subsidizes the rest of us on coach, so raising traffic would simply increase the size of the financial disaster. Meanwhile, having siphoned off the gravy passengers that provide the airlines' profits, you're subsidizing rail in order to produce higher fares for business passengers, which will cut travel and make the hub and spoke system extremely broken. Since airlines are a linchpin industry in a country the size of the US, they'll have to be kept going at the taxpayers' teat. In other words, you're talking about spending a huge chunk of change in order to move not that many more passengers. You simply can't overcome the size and population dispersion of the United States.

I'm definitely in favor of more deregulation -- but there's a small problem of what to do with the cities and states who are in hock to the tune of billions of dollars to build new airports. The city of Denver has $4 billion dollars of debt for the Denver International Airport. United leases 70% of the gates. If United fails, Denver fails.

As long as cities such as Denver are footing the bill to pay for the airports, then a certain amount of regulation is needed -- and no, I'm not talking about micromanagement like approving each retailer's lease in the airport mall like Denver's city council does today.

My solution is simple: Airports should require that airlines meet a simple standard: short turn times at the gate -- and if they fail to meet that standard, they lose their gates and airlines who can meet the standard are allowed in.

I've read several reports that show that airlines with the lowest time spent at the gate are also the most profitable. Lower gate times also mean that the airport is more efficiently used and more airplanes can land there -- bringing more passengers who can buy more crap in the airport malls. (what's not to like?)

The point is that I believe certain types of regulation can be effective at "encouraging" the airlines to either streamline operations or be replaced by airlines that can -- like Southwest and JetBlue.

Oh, while we're quoting RPPI and discussing rail travel (ok, I know, two seperate posts)...here's an interesting critique of mass transit systems: http://www.rppi.org/ps243.html

Mass transit light rail has been hailed as a success here in Denver -- and I live right above a light rail line so I can confirm the trains are packed. I can also confirm the hordes of empty buses that still crowd traffic in downtown Denver each day. How does it make any sense to steal ridership from cheaper to operate buses just so light rail can be successful?

Jane,

I don't know what you're reading, but you're just wrong. Let us start with the fact that the train takes between 2 to 3 days to get across the country. Don't believe me, check out Amtrak's web-site. There are three routes it can go. The southern most takes about 55 hours. The middle route takes the longest, because you go through one of the most beautiful parts of this country, the Rockies, and the trains slows down and does it in the middle of the day so everyone can see. Have you ever been to the donner pass? I have and it's just amazing.

I've driven across the country in five days, and that was with eight hours of sleep each night. I couldn't read, watch movies, pee when I wanted to. I own a car, but would always rather take a train than drive.

Then lets look at the numbers. Those cross-country trains are always sold out. Always. First class compartments go months in advance. Don't belive me? Just ask, I'll send you the raw data.

Now lets look at Amtrak expansion. How about the Portland to Boston run. They've been clammoring for it for 20 years. Finally happened 18 months ago. It's a huge success. They're trying to keep up with demand. Only two problems. 1) not enough trains. 2) Guilford rail lines, which has a lease to use the track for freight as long as they keep it up, doesn't repair the track soon enough. More people would take the train if it ran more often.

Just let me know. I'd be happy to send you reems of data on this stuff.

Kate,

I live on the Western Zephyr route and much as I'd love to take it west, I can't afford to. Even with bloated United fares, whenever I've checked the fares on Amtrak, they've been 1/3 more to double the fare of a 14 day advance ticket on United.

For example, this past Christmas, I thought it would be fun to take the train to visit my parents in Minneapolis. Here's how it would have worked: For $600, I would have left Denver at 6pm. At 3:45pm the next day I would arrive in Chicago. Unfortunately the train to Minnapolis left Chicaco at 3:30 pm, so I have to take a cab (another $30-40) to a hotel in Chicago to spend the night (another $100 at least). Then, I have to wait until 3:30 pm the next day to catch the train to Minneapolis which would arrive at 11:30pm at night. On the return trip, I'd have to repeat the process for a grand total of almost $1000 and almost 100 hours of travel time to complete a trip that I could have driven myself in less than 15 hours.

And you think this is preferable to air travel? Instead of the train, I paid $280 for a 7 day advance ticket. Even with a connection in St. Louis, my total round trip travel time was 9 hours.

All this being said, I'd still love to one day take the Western Zephyr from Denver to San Francisco -- but as a vacation, not as a means of transportation.

In short, there's nothing wrong with Jane's numbers.

It might be that they just don't have the airplanes to keep up the full flight schedule, because by contract with the military a portion of the commercial fleet is a military reserve. With the war going on in Iraq, the military must need every big long-range airplane than can get their hands on for hauling supplies and men over there.

Of course, it's also a good way for airlines that are losing money to squeeze out the low-priced fares, fill every airplane, and markedly improve their gross profit margin. I'm not sure how a better margin on less business is going to help with excessive overhead costs, but massive layoffs might cut into the overhead. Or not...

Kate -- where are you getting your data? I'm getting a minimum travel time of 3.5 days to SF from New York -- perhaps you are thinking of LA? Also, I have no trouble going on to Amtrak's site and getting accomodations a week or two in advance. You may recall that Dad's in the transit biz, plus he's a huge train buff.

The capital returns stink. You have to run more trains by an order of magnitude to make high speed rail even remotely attractive, because freight, which amortizes a large chunk of the capital stock, won't pay any premium for high speed -- the weight penalties make the fuel burn unworkable. For that reason, high speed rail will never be affordable; for political reasons, it will never be high speed. The Acela shaves a few minutes off the most highly travelled route in the country. There's no reason to think it would fare differently elsewhere. If there's excess demand for the trains we currently have, I'm not seeing it; with a week's notice, I can book lovely accommodations, while with a day's notice I can travel upright. Given that there are only two trains a day running SF/NY and three running the other way (that doesn't seem quite right, does it?), that seems to show service is quite adequate to demand, since no one takes a cross-country rail journey in an emergency. First class hobbyists may be in tough luck, but I really see no reason that the American taxpayer should be subsidizing the travel of anyone travelling first class. Midwestern routes, with more, less populous population centers, are even more over-served.
Rail works on the East Coast, kinda sorta, although only because no one expects it to make money. But the coast is the only place where rail traffic is even potentially profitable. No matter how much you argue, you simply can't overcome the fact that there are not enough passengers on long portions of the route to provide adequate demand -- and demand is what drives the hub-and-spoke system that enables the airlines. Even if there were excess demand, it's not a question of whether you can run an extra train or two -- it's a question of whether you can run sufficient trains to make the required capital improvements even start to pay for themselves. In the age of the automobile, it's mathematically impossible. And if people were willing to pay anywhere near the market freight to travel across the country at current speeds, Amtrak would run more trains. They're happy to service demand, which is why the Boston-Virginia line runs so many. The fact that they are running two-three trains a day tells me that either demand is insufficient, or demand is sufficient at a price that doesn't cover the extra costs. I'm sorry, but not even the most die-hard serious rail buffs I know believe that transcontinental traffic can be made workable; they concentrate on a handful of urban routes between large population centers with high levels of cross-traffic -- and at that, it can't seem to get off the ground on the West Coast. It works for you because you essentially want to travel between coasts, and as a student had free time. If you were an ordinary joe with two weeks a year, would you waste seven of those days on the train? Especially if you wanted to go somewhere a couple hours from a train station?

The larger question is why on earth we would pay for passenger rail. There is an argument that airlines, if the industry was in danger of going out of business, would have to be supported because as a nation we do have a vested interest in supporting the infrastructure to quickly move people from point A to B in emergencies. Rail doesn't fit that. It's not energy or cost efficient at low capacity utilization. Heavily subsidized (and Amtrak subsidies dwarf airline subsidies when you consider the number of passengers), a train journey with a basic bedroom only during the sleeping legs, planned months in advance, costs me 3-5 times the same transcontinental flight, which gets me there in six hours. For groundhogs, it simply can't compete with the ability of an automobile to take you directly to your destination. It can't attract the business travelers who subsidize the rest of us no matter how nice the view is, because companies aren't going to pay their employees to sit on a train for a day. I don't really see any reason why people who will never use rail should be forced to pay billions in taxes so other people -- people from more affluent regions -- can enjoy their hobby.

The explanation for the airlines alleged financial difficulties isn't so complicated. Like any business, airlines are adversly affected by market uncertainty. Uncertainty drives up the cost of loanable funds, making it difficult for the business to borrow money to finance its short-term investments and operations.

War is one of the biggest uncertainties there is. For the months while the UN wrangled and no one was sure whether we were going to war or not, the market tanked. Then, when Bush gave his 48hr ultimatum and that uncertainty ended, the market had one of the strongest rallies in years. Now, it looks as if the war may be longer and more difficult than originally believed (uncertainty as to whether it will cost more than expected) and the market is tanking again. Uncertainty sucks.

I don't know the airline industry's financials off the top of my head, but this is a basic tenet of economics. Industries like airlines that already operate on relatively thin margins are highly susceptible to it. It's the uncertainty, stupid. ;)

What say you to rail travel in the Midwest?
Minneapolis, Kansas City, Cleveland, and Lexington as the four corners?

On a related note, WSJ has an article detailing the differences in approach between Airbus and Boeing to customer acquisition.

http://online.wsj.com/article/0,,SB1047243854826319840,00.html?mod=home_page_one_us

The Airbus approach is simply alarming. To get a deal with Iberia, Airbus was willing to repurchase the planes at a guaranteed predetermined price from Iberia if it no longer needed them. This on top of extremely low margins -- way lower than Boeing was willing to go.

Given the recent news of the downturn, what started as stupid deal on Airbuses part must now be seen as an incredibly stupid deal. My understanding is that Airbus is now a part of a publicly traded consortium, but one has to believe that the old government supported mentality still exists otherwise heads would be rolling right about now.

"Let us start with the fact that the train takes between 2 to 3 days to get across the country."

Not last time I checked. I took a train from Cincinatti to Seattle a few years ago, and it was a three-day trip. I have trouble believing that the additional distance to NY would *shorten* the travel time. And there wasn't any touristy slowing down for the Rockies, either; we went through the mountains at a slower pace purely because we were going uphill, and we crossed the mountains after dark.

Don't get me wrong, I enjoyed the trip, but it cost me more than a plane ticket would have for a trip that took 10 times as long.

"Then lets look at the numbers. Those cross-country trains are always sold out. Always. First class compartments go months in advance. Don't belive me? Just ask, I'll send you the raw data."

Not in my experience. That Cinci-Seattle train was hardly "sold out". There were a fair number of people on board, and a fair amount of churn, but there were definitely empty seats/cabins.

I checked on a trip (for the 5 of us) from Dallas to California several years ago (I know, the numbers might have changed since then, but still...) and it was cheaper for the 5 of us to fly than to take the Amtrak. And, as many people have pointed out, it's much faster. We left here at 9:00 a.m. and were in CA by 9:30 (with the time change) instead of 22 hours later. Train travel is only worthwhile IF you consider the time spent on train as part of the vacation, in my mind.

Dsquared/Jane,

Richard Branson apparently doesn’t think obstacles to entry are insurmountable or that the economics of the industry, in and of themselves, are unattractive. Virgin announced plans yesterday (March 24) to open a domestic budget airline in the US.

The economics of the airline industry are very, very complicated, and I don't pretend to be an expert. Nor was I trying to assert that it's impossible for a major to make money; only that it might be -- aggregate demand for air travel, especially at higher price points, may have sagged to the point where the equilibrium will rest at a much lower level of consumption at higher prices. I don't know that this is true; I simply think it may be a possibility.

Budget airlines are not quite the same thing as the majors. For one thing, they don't fly first class, and they generally fly out of regional airports. That's a one-trick pony; the entire industry can't abandon the major airports. For another, the direct flight system supposedly can't affordably maintain current levels of traffic outside the major markets, because no one wants a twelve hour layover, plus it gets very complicated to assemble a travel plan.

The economist had an entire section dedicated to air carrier economics a few years ago -- from what I remember, the system favors budget players like Southwest, JetBlue, (and apparently Branson) in certain niche corridors -- the factors to the their success are:

- low union influence or non at all.
- use of secondary airports where gate fees are lower (Dallas Love instead of DFW)
- standardized airplanes (SW uses 737's, JB uses Airbus)
- very short gate turn times.
- fewer people in the process.

Food and other perks count but are very minor costs in the overall equation.

If it were me running an airline, I can't think of a better consumer package than JetBlue. Every seat is leather, has DirecTV video and the stewards are more than happy to give you a ton of snacks during the flight. The overnight from Denver to NYC has to be about the most perfect flight in the industry (with the exception that you're stuck in commuter traffic from JFK into the city). All that remains is internet access and I'm pretty sure the equipment that JetBlue uses is capable with an upgrade.

I'm actually surprised United and others still cling to the notion that they somehow provide a higher level of service in exchange for a higher price. All that I can see that is different is that they redistribute money from employers to employees in the form of generous frequent flyer perks. In my book, it's another way of stealing from the rich and giving to the poor -- aka communism. I frankly think if business travelers ignored FF perks, within 1-2 years, we'd have a totally different air travel marketplace and probably a cheaper one too.

Matt, I'm not sure if this is what you meant, but a list of the Economist's articles on airlines is here.

AirTran (motto: We're Cheap, We're Ugly, But God Damn It, We WILL Get You From Atlanta to Moline-Quad Cities for Under $200 Round Trip) has been running profits lately alongside Southwest and JetBlue, and with nice shiny Boeing 717s to boot. That may change now that JetBlue is entering the ATL market and AirTran is doing away with what was possibly the most user-friendly frequent-flyer program ever, but in the meantime they've been giving Delta fits.

I would think high union contract costs and high fixed costs would make a big difference, though I'm not sure how that would translate into the European market. Pricing structure HAS to be a factor; the airlines were doing a lot better, as best I know (feel free to correct me) before the pricing websites came along. One of the reasons I've preferred AirTran is that the cost of a round trip equals the cost of two one-ways -- so it's far easier for me to, say, fly into New York and out of Boston on AirTran than it would be on Delta.

And for purely nostalgic reasons, rather than sensible ones -- I miss Eastern.

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